Exploiting ergodicity in forecasts of corporate profitability
comunitat-uji-handle:10234/9
comunitat-uji-handle2:10234/8643
comunitat-uji-handle3:10234/8644
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https://doi.org/10.1016/j.jedc.2019.103820 |
Metadata
Title
Exploiting ergodicity in forecasts of corporate profitabilityDate
2019-12-13Publisher
ElsevierBibliographic citation
MUNDT, Philipp; ALFARANO, Simone; MILAKOVIĆ, Mishael. Exploiting ergodicity in forecasts of corporate profitability. Journal of Economic Dynamics and Control, 2020, vol. 111, p. 103820.Type
info:eu-repo/semantics/articlePublisher version
https://www.sciencedirect.com/science/article/pii/S0165188919302155Version
info:eu-repo/semantics/publishedVersionSubject
Abstract
Theory suggests that competition tends to equalize profit rates through the process of capital reallocation, and numerous studies have confirmed that profit rates are indeed persistent and mean-reverting. Recent ... [+]
Theory suggests that competition tends to equalize profit rates through the process of capital reallocation, and numerous studies have confirmed that profit rates are indeed persistent and mean-reverting. Recent empirical evidence further shows that fluctuations in the profitability of surviving corporations are well approximated by a stationary Laplace distribution. Here we show that a parsimonious diffusion process of corporate profitability that accounts for all three features of the data achieves better out-of-sample forecasting performance across different time horizons than previously suggested time-series and cross-sectional models. As a consequence of replicating the empirical distribution of profit rates, the model prescribes a particular strength or speed for the mean-reversion of all returns, which leads to superior forecasts of individual time-series when we exploit information from the cross-sectional collection of firms. The new model should appeal to managers, analysts, investors, and other groups of corporate stakeholders who are interested in accurate forecasts of profitability. To the extent that mean-reversion in profitability is the source of predictable variation in earnings, our approach can also be used in forecasts of earnings and is thus useful for firm valuation. [-]
Investigation project
Universitat Jaume I (project UJI-B2018-77) ; Generalitat Valenciana (project AICO/2018/036) ; Ministerio de Ciencia, Inovación y Universidades (project RTI2018 096927-B-I00.)Rights
© 2019 Elsevier B.V. All rights reserved.
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- ECO_Articles [696]